Monopolistic Competition

- many firms creating differentiated products - characterized by a large number of firms and low entry barriers - entry to the industry is more difficult than under pure competition, but not nearly as difficult as under pure monopoly - it's model assumes that firms will engage in non-price competition

Non-price Competition

Monopolistic Competitive Firms

- have a highly elastic demand curve - may realize either profits or losses in the short run, but realize normal profits in the long run - in the short run, profit maximizing firms sets it's price above marginal cost - in the long run, a profit maximizing firm sets it's price above marginal cost and will be equal to average total cost (ATC)

In a Monopolistic Competitive Market

- new firms will enter industry until economic profits are zero - industries are inefficient because they are over populated with firms whose plants are under utilized -- the economic inefficiencies may be offset by the fact that consumers have a number of variations of the product from which to choose

Excess Capacity

- refers to the amount by which actual production falls short of the minimum ATC output Oligopoly = - indicates a few firms either differentiated or homogenous products - industries are characterized as a few dominate firms and substantial entry barriers - difficult to analyze primarily because the price and output decisions for any one firm depend on the reactions of it's rivals

Homogeneous Oligopoly

Examples of Homogeneous Oligopoly

Differentiated Oligopoly

- exist where a small number of firms are producing goods that differ in terms of quality and design Examples of Differentiated Oligopoly = - automobile, household appliance, and automobile tire industries

Inter-industry Competition

Cartels

- The likelihood of being successful is greater when cost and demand curves of various participants are very similar - Is difficult to maintain in the long run because individual members may find it profitable to cheat on agreements - in the US, are in violation of the antitrust laws